On Appeal from the District Court of the United States for the Western District of Texas.[ Thompson v. Consolidated Gas Utilities Corp. 300 U.S. 55 (1937) ]
[300 U.S. 55 , 57] Messrs. Wm. Madden Hill, of Dallas, Tex., C.C. Small, of Amarillo, Tex., and Wm. McCraw and W. J. Holt, both of Austin, Tex., for appellants.
Mr. S. A. L. Morgan, of Amarillo, Tex., for appellees.
Mr. Justice BRANDEIS delivered the opinion of the Court.
This case challenges the validity of a gas proration order issued by the Railroad Commission of Texas for the Panhandle fields on December 10, 1935, and carried forward in supplemental orders. 1 The orders were en- [300 U.S. 55 , 58] tered under chapter 120 of the Texas Acts 1935, Forty-Fourth Legislature, Regular Session, commonly known as House Bill 266 (Vernon's Ann.Civ.St.Tex. art. 6008). Under the orders the production of sweet gas from the plaintiffs' wells is limited to an amount below their market requirements under existing contracts, below their present production, and below the capacity of their transportation and marketing facilities. It is charged that the purpose of so limiting the production is not to prevent waste, or to prevent invasion of the legal rights of co-owners in the common reservoir, but solely to compel the plaintiffs, and others similarly situated, to purchase gas from those well owners who have not provided themselves with a market and marketing facilities-well owners who under existing law are obliged to stop production, for want of a market, unless some marketing outlet is found.
Two suits to enjoin enforcement of the order were brought in the federal court for Western Texas. One was by Texas Panhandle Gas Utilities Company, for which Consolidated Gas Utilities Corporation has been substituted as plaintiff; the other by Texoma Natural Gas Company. In each suit the members of the Railroad Commission and the Attorney General of the State were made defendants. The properties for which the plaintiffs seek protection are their sweet gas wells and reserves in the Texas Panhandle; their pipe lines extending into other States; their compressors and marketing facilities for use in connection therewith; and contracts which they have made for the supply of the gas to distributors in other States. The plaintiffs claim that the order takes this property without warrant in law. They contend that the order is in excess of the authority which House Bill 266 confers upon the commission; and that, if the statute be construed as conferring the authority exercised, it violates the Federal Constitution and that of the State. The District Judge issued a restraining order. The cases [300 U.S. 55 , 59] were considered together. The court, three judges sitting, granted temporary injunctions, Texas Panhandle Gas Co. v. Thompson (D.C.) 12 F. Supp. 462,2 and made them permanent, Consolidated Gas Utilities Corporation v. Thompson, 14 F.Supp. 318. The cases were consolidated for purposes of appeal. The jurisdiction, federal and equitable, was not questioned. The record is extensive; the findings of fact explicit; the briefs in this Court occupy over 500 pages.
The Texas Panhandle contains the largest natural gas field in the United States, an enormous reservoir of natural gas and oil extending through seven counties for a distance of 125 miles with a width of from 10 to 40 miles. The development of the gas industry which began there in 1926 has proceeded at a rapid rate since 1933. The field produces both sweet and sour gas. 3 Wasteful use of sweet gas is prohibited by the statute; and, within the statutory definition, practically the only nonwasteful use is for heat and light. For such use there is substantially no local market,4 as the region is sparsely settled. Gas cannot be stored. To utilize the sweet gas of the Panhandle field, it must be delivered to the ultimate consumer by pipe lines in a continuous flow from the wells to the burner tips of the consumer. Prior to the entry of the orders challenged, the owners of approximatey 80 per cent. of the total area in the Panhandle fields [300 U.S. 55 , 60] proven productive of sweet gas had constructed six major pipe lines from the West Panhandle field,5 and three from the East Panhandle field, extending to Chicago, Des Moines, Omaha, Sioux City, Kansas City, St. Paul, Indianapolis, Denver, Minneapolis, Fort Worth, Dallas, and other distant points. Six or seven of these major pipe line companies, including the plaintiffs', have produced and transported to the markets only gas produced from their own leases.
Under the restrictions imposed by the present statute, there is substantially no market outlet for the sweet gas of these fields except such as may be provided by pipe lines. The owners of 180 wells in the West Panhandle field, and of 121 wells in the East Panhandle field, together representing about 20 per cent. of the proven reserves of sweet gas in the whole field, neither own nor control any pipe line. And they have no access to any;6 since none of the pipe lines here involved is a common carrier. The plaintiffs and most of the other owners of pipe lines have no economic occasion to purchase gas from wells of the non-pipe line producers, as the potential capacity of their own wells far exceeds their market demand. 7 There appears no legal obstacle, under the law of [300 U.S. 55 , 61] Texas, to the construction of additional pipe lines to serve the owners of wells in the Panhandle fields now without such connections. It is said that there are communities in other States which would afford markets if pipe lines were constructed to reach them. But the financial difficulties are obvious.
Prior to House Bill 266, several efforts, statutory and administrative, had been made to compel, or induce, the owners of existing pipe lines to purchase the seeet gas of those well owners who lack pipe line facilities. Orders entered under statutes enacted prior to 1933 were enjoined as unconstitutional or ultra vires. 8 By chapter [300 U.S. 55 , 62] 100, Acts 1933, Forty-Third Legislature, Regular Session,9 the use of natural gas was permitted for other purposes than light or fuel, including the manufacture of natural gasoline, where no reasonable market for light or fuel was available to the owner. Production under authority of this statute and the permits issued thereunder was found to involve intolerable waste. 10 Such was the situation when on May 1, 1935, the Legislature enacted House Bill 266 (Vernon's Ann.Civ.St.Tex. art. 6008), under which the order here challenged was issued.
The act undertakes by drastic provisions to end the waste of sweet gas. It provides:
The defendants contend that the act likewise requires restriction of production regardless of the existence of waste, for the adjustment of rights of owners in a common reservoir of gas. And, as we read the substance of defendants' argument, they also construe the statute as authorizing gas proration orders, to provide a market for the sweet gas of those wells which, because they lack pipe line connections, have heretofore sold their gas for inferior, wasteful uses. These claims are rested primarily on the following provision:
This provision is supplemented by others including those set forth in the margin (Vernon's Ann.Civ.St.Tex. art. 6008, 1, 11, 12, 14, 16, 20). 11 [300 U.S. 55 , 64] On December 10, 1935, the Railroad Commission, after hearings held, issued the basic order here challenged, which provides, among other things:
East Panhandle Field 181,174,000 cubic feet daily West Sweet Panhandle Field 608,552,000 cubic feet daily West Sour Panhandle Field 451,137,000 cubic feet daily
'It is ordered, That the daily allowable production of gas for individual wells in the East and West Panhandle Fields shall be determined by dividing the reasonable market demand into two parts, and that these parts shall be distributed to each well in proportion to the relative [300 U.S. 55 , 65] producing ability of these individual wells and the number of acres containing each of these wells, but in no case shall more than one hundred sixty (160) acres in the East Panhandle Field and not more than Six Hundred Forty (640) acres in the West Panhandle Field, in both sweet and sour zones, be allocated to any one well for the purpose of proration.
The order reduces plaintiffs' allowable production to a volume far below their requirements. The plaintiffs and other pipe line owners acquired, at large cost, their markets in distant States and their transportation and marketing facilities. 12 By means of their pipe lines all the sweet gas produced by the plaintiffs (and likewise all produced by other pipe line owners) was, and is, marketed under contracts with distant distributors, chiefly in other States. These markets are not free markets. The plaintiffs necessarily bound themselves to supply the requirements of the distributors; and the distributors bound themselves to take their requirements from the plaintiffs. In order to fulfill their contractual obligations, the plaintiffs developed the capacity of their wells and acquired large reserves to provide for their future needs so that they have no occasion to purchase gas from other wells. By limiting the plaintiffs' allowable production, the order disables them from perform- [300 U.S. 55 , 67] ing their contracts unless they purchase gas from non-pipe line wells. Such purchases would at least involve the cost of the gas and the loss resulting from failure to make fuller use of their own property.
The plaintiffs do not contest that the State has power to conserve its natural resources for the public, as well as to protect private rights, 13 or that the Legislature has power to confer upon the Railroad Commission authority to make and enforce regulations to that end; or that to limit production to the aggregate reasonable market demand is, as a conservation measure, clearly proper in the interest of the public and of the private persons owning the right to draw from a common reservoir; or that the commission has authority to issue regulations to that end. The plaintiffs do not deny that the Legislature may confer upon the Railroad Commission also authority to prorate the total allowable production among all the individual wells which draw from the common reservoir, provided the proration is in accordance with their respective market demands and due consideration is given to existing reserves. But they insist that House Bill 266 (Vernon's Ann.Civ.St.Tex. art. 6008) has not conferred that authority. And as to the order, the plaintiffs assert that, while restrictive in form, it is in fact coercive; that its purpose and effect are not to prevent waste of gas in the common reservoir nor to prorate the opportunities of production as distinguished from marketing; that the limitation of the production of the wells is merely a device to compel the individual plaintiffs, and other pipe line owners, to purchase gas for which they have no need; that the real purpose and [300 U.S. 55 , 68] effect of the order are to prorate, not production, but distant markets and the facilities for serving them; and that, thus, the order takes their property without warrant in law.
First. Prior to the enactment of House Bill 266,14 the property rights of the plaintiffs were substantially those conferred by the common law of the State. Under it, the owner of land has title to oil and gas in place and, likewise, to the oil and gas which migrate to formations under his land through drainge from other lands. 15 Under that rule, he may produce all the oil and gas that will flow out of the well on his land, subject to the exercise by other landowners of the same right of capture through drilling offsetting wells, so as to get their full share. 16 This common-law rule, declared in an unbroken line of authorities, has been widely applied. 17 While a producer who negligently uses explosives in his operations will be liable if he causes physical damage to his [300 U.S. 55 , 69] neighbors' gas and oil bearing strata and thus impairs the productivity thereof,18 the common law of the State did not, apparently, afford a remedy against depleting the common supply by wasteful taking or use of oil or gas drawn from the wells on one's own property. But since 1899 the Legislature of the State has prohibited, or curbed, certain practices in the production of gas and oil which it recognized as wasteful.